Several years ago now auditing standards began to require peer reviews. It answers the question of "Who audits the auditor?" Over the course of my career I've had 3-4 peer reviews of my office's operation. I have found them valuable. You always learn from a peer review. It allows you to see your audit operation through different eyes. It also adds credibility to your office. The public and your elected decision-makers can gain confidence from the fact that every three years auditors, with no stake in your office, review your procedures to determine that they follow audit standards and examine audits to ensure that auditors followed procedures.
It is with interest that I've been following the largest financial fraud in history. The S.E.C. is now investigating why years of regulation did not uncover the fraud. On Freakonomics they're recommending a career option for Bernie Madoff, the perpetrator of the fraud. And it's been discovered that Mr. Madoff's auditor doesn't audit. According to this report, the auditing firm that conducted audits has been telling the AICPA for years that they don't conduct audits in order to avoid having a peer review conducted. Here's another story about why a three person auditing firm would be conducting audits of multibillion dollar operation.
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Suzanne:
In the Big 4 world, there has recently been quite a controversy over whether the PCAOB regulatory reviews of the big 4 are having any real effect on improving certain consistent poor practices, especially on areas of high audit risk. If you haven't seen it already, you may enjoy Re: The Auditors, which focuses on Big 4 issues, from a very populist ex-Big-firm perspective.
Regarding the 3-person firm not receiving a peer review, while it should be a scandelous that they were able to do the "audit" for such a large firm, the bigger question is one of motives. I personally believe that we should consider financial statement insurance (FSI), which would open competition in the audit market, and improve the audit quality in the highest-risk firms, while addressing the problems of motives.
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